Bulgaria's Municipal Bank should raise its capital by between BGN 15 and 20 million in order to maintain its market presence and to develop further in view of Bulgaria's forthcoming EU accession, experts say. Thus the paid-in capital of the bank will grow to between BGN 40 and 45 million and its equity capital will reach BGN 65 million. The capital raise operation is prompted by the capital adequacy requirements of the Basel II accord, the bank said. An analysis of rating agency Standart&Poor's shows that an upgrade of the rating of the bank would depend on the increase of its equity capital. If Municipal Bank fails to raise its capital, it will lag significantly behind the other players in the sector, according to experts of the Bulgarian National Bank (BNB).

On the other hand, the city council of Sofia decided April 20th not to take part in the planned capital hike of Municipal Bank to BGN 45mn (EUR 23mn) from BGN 25mn. The municipality holds around 60% of the bank at present through direct and indirect participations and will fall well below the controlling quota of 50% after the capital hike. The price of the municipal skate will thus lose the management control premium and the local government will have to project much weaker privatisation receipts from the Bank, which is already put for sale. The decision of the city council is motivated by lack of financial resources to take part in the capital hike proposed by the private shareholders. The municipality may still try to block the equity expansion proposal during the voting of the shareholders' meeting but it is rumoured that some of the municipal firms presented in the shareholders' structure will act in favour of the private interests for hostile acquisition of the lender. Municipal Bank has total assets of BGN 465mn (EUR 238mn) as of the end of 2005 and a full-year net profit of BGN 3.9mn.

Sofia City Council voted on April 13 to move with the sale of its 67 per cent share of Municipal Bank. Sofia municipality intends to sell its stake in the bank through the Sofia Municipal Privatisation Agency. The city council will again have the final say on the successful buyer.

Sofia municipality holds 67 per cent of the bank while local businessman Hristo Kovachki, via 11 related companies, controls a blocking 26 per cent. Sofia City Council Values 75% Of Municipal Bank at EUR 25mn. The city council of Sofia projects that the revenues from the planned privatisation of Municipal Bank could exceed EUR 25mn if the local authorities succeed to regain control on 75% of the share capital.

The municipality lost control over the bank a year ago when some municipal companies sold their share to Kovachki behind the city council’s back.

Sofia City Council decided in late 2004 to privatise its majority stake in Municipal Bank. Later, bank supervisory board chair Lyubomir Pavlov and executive director Vassil Piralkov were investigated in connection with what was claimed to be a secret transfer of municipality-owned shares to private entities. The court, however, found Pavlov and Piralkov not guilty.